AT&T Inc. (NYSE: T) on Sunday announced it plans to buy smaller rival T-Mobile USA for $39 billion, which would create the largest U.S. wireless carrier and a formidable competitor for current industry leader Verizon Wireless (NYSE: VZ).

AT&T's offer to buy T-Mobile from Deutsche Telekom AG (PINK ADR: DTEGY) is the industry's biggest acquisition since 2004 and combines the industry's second and fourth largest providers. It would add 34 million customers to AT&T's 96 million, giving the newly formed company 43% of the U.S. wireless carrier market and surpassing Verizon's 34% market share.

Sprint Nextel Corp. (NYSE: S), the third biggest U.S. wireless provider, was rumored to be in talks with Deutsche Telekom about purchasing T-Mobile USA. Sprint has struggled in the wireless market behind Verizon and AT&T. The new deal would give AT&T twice as many customers as Sprint.

AT&T not only wants T-Mobile's subscriber base, but also needs the additional spectrum, or airwaves, to expand its network and serve surging demand for video and data content delivery. The new company will also save an estimated $3 billion annually when it eliminates overlapping operations like retail outlets and advertising spending.

"From AT&T's perspective, this is a huge win," independent analyst Chetan Sharma told The New York Times. "It's about being No. 1 and having economy of scale."

AT&T hopes to improve its network after many customers – especially iPhone users -complained about its quality. Network congestion has resulted in a growing number of dropped calls and connectivity issues.

It's also using the deal to help expand its rollout of high-speed wireless technology known as Long-Term Evolution (LTE) or 4G. AT&T hopes to catch up to Verizon, which has already announced at least a dozen new smartphones and tablet computers using 4G network technology.

AT&T will pay $25 billion in cash, partly financed from a $20 billion loan from JPMorgan Chase & Co. (NYSE: JPM). Deutsche Telekom will get an 8% stake in AT&T and be an executive on its board of directors.

Regulators will closely scrutinize the deal because of the possible anti-consumer effects of two wireless carriers, AT&T and Verizon, holding around 75% of the market. T-Mobile's low prices have kept downward pressure on AT&T and Verizon rates.

"Phenomenal deal if it happens," Jonathan Chaplin, an analyst with Credit Suisse Group AG (NYSE ADR: CS), wrote in a research note Monday. "Huge upside for AT&T; DT getting a great price; however, we believe regulatory risk is enormous."

AT&T Chief Executive Officer Randall Stephenson estimated total savings for both companies would reach $40 billion. Stephenson has focused on growing his company's wireless offerings since stepping into office in 2007. AT&T's wireless business would account for 80% of revenue if the deal goes through.

Deutsche Telekom supports the deal as a strategic way to get rid its struggling subsidiary. The German phone operator bought T-Mobile, formerly VoiceStream Wireless, for $35 billion in 2001. It poured billions of dollars into the venture to expand the network and spectrum, but was never able to beat out stronger rivals.

Analysts said AT&T is paying Deutsche a significant premium for T-Mobile. Bank of America-Merrill Lynch (NYSE: BAC) in December valued T-Mobile at around $23.2 billion, and JPMorgan Cazenove valued it at $25 billion.

At least four analysts upgraded Deutsche Telekom's stock after the news broke. Shares rose as high as 16% in intraday trading in Frankfurt – the company's biggest intraday gain ever – and closed up 9.93%

AT&T was up 1.3% in afternoon trading; Verizon was up 1.6% and Sprint slumped 15%.

Regulatory Hurdle Set High

Consumer advocate groups and politicians spoke out against the deal and claimed it would usher in higher prices and less innovation.

"It's difficult to come up with any justification or benefits from letting AT&T swallow up one of its few major competitors," Parul P. Desai, policy counsel for the nonprofit group Consumers Union, told BloombergNews. "AT&T is already a giant in the wireless marketplace, where customers routinely complain about hidden charges and other anti-consumer practices."

AT&T will honor existing T-Mobile contracts, but those customers could see higher rates when their current agreements expire.

Sprint also criticized the deal and said the industry would be "dominated overwhelmingly" by just two companies.

"It's just nuts," David Balto, an antitrust attorney and former policy director at the U.S. Federal Trade Commission, told Reuters. "When you look at healthy and unhealthy markets, this is at the top of the list of unhealthy markets."

But AT&T said the wireless industry is still "fiercely competitive," with five carriers still available for U.S. consumers. The company cited a study by the U.S. Government Accountability Office that showed cellular subscription costs fell 50% from 1999 to 2009, during a period of industry consolidation.

AT&T's Stephenson said he did not expect a problem with approval.

"We studied this thing extensively over the last few months and we're very confident it will be approved," Stephenson said.

AT&T defended the deal as a way to better provide wireless service to rural areas, which is a goal of the Obama administration.

Regulators could require certain conditions to approve the deal, like making AT&T commit to expanding their network in underserved markets, according to analyst Roger Entner from Recon Analytics.

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